Strategic Flexibility–Managing in Disorderly Markets
Thomas C Schleifer, Ph.D.
Last week in a Case Study of Disorderly Markets – we summarized the series of management decisions made by governments in response to post-pandemic economic developments. I think it’s fair to say that each reflexive decision seemed to make matters worse. Contractors, like political leaders are making management decisions based on conditions we are not familiar with from past experience. The rub is, however, governments had no experience dealing with this post-pandemic disorderly market and, even with the best of intentions, their decisions were inappropriate and ineffective.
A Construction Company CFO’s Own Words
CFO: “Even the so-called experts don’t know what’s going on. For example, what are the root causes of the inflation that we’ve got right now? Well, to me, some of them are intuitive, like supply-chain disruptions. Is it going to make a difference to those supply-chain disruptions if the Fed increases the rates by 75 basis points? I don’t think so. So, what happens to prices if a rising cost of capital pours more fuel on an already raging inflation fire caused by supply shortages? I can tell you. Costs go up even more.”
Tom Schleifer: How are you and your company responding to all this uncertainty?
CFO: “We figure, if inflation is resilient and the Fed keeps raising interest rates, we’ve got a couple of very different scenarios:
- Scenario A is a hard-landing recession that begins in the winter of 2023. A hard landing could be year-over-year real growth of negative several percent. What happens to our firm? It’s my job to do a simulation to figure it out. We’ve got to plan that as soon as there’s a strong indication that growth will substantially decrease, we can start pressing the buttons.
- Scenario B is a soft landing where maybe you have zero growth or 1% real growth. Now that’s very different. We don’t want to cut our capacity or damage our competitive advantage. We would shift back into a wait and see posture.
- But the worst way to manage is to have to improvise. We need to have a plan that shows us step-by-step what the triggers are and where to take action. We need a longer-range plan that sees us all the way to the other side of this market disruption. The key here is to be able to weather the storm and come out of the storm, potentially, in a position that’s stronger than our competitors.”
TS: What’s the key to being able to plan long range step-by-step? It seems like a contradiction in terms.
CFO: “Flexibility. No decision is cast in stone in advance. When managing a company through the storm of a disorderly market, you cannot be married to anything or anyone.
- The staff must remain flexible. Even my job is impacted. A CFO is kind of a finance freelancer and their department’s workload is dictated by the company’s needs. When the workload peaks the CFO can be able to focus deeply on the company’s strategic activities by offloading some daily accounting tasks to temporary or part-time accounting staff.
- Your overhead must be flexible. Lease equipment that you can offload whenever this disorderly market takes a sudden turn for the worse. Rent or lease a portion of office and/or shop space if at all possible.
- Your choice of subs and suppliers must be open to reevaluation every step of the way.
- Financial flexibility is really important, and that’s where we try to get the competitive advantage. When a company goes into a slowdown or a recession, they can be forced to spend the cash that they’ve got. There might be a great opportunity, once the economy turns, but can we finance it? A company that has been wise in terms of its debt management and cash management can seize that opportunity.
Crossing a Moving Stream
“It’s like crossing a moving stream. You carefully jump from one rock to the next testing the stability and the height of the water with each leap. If the water is higher in one spot, you look for a little bigger rock. If the next rock is moving as the water rushes over it, you look for a steady rock to support your next leap. One careful step at a time and pretty soon you’ve made it to the opposite shore. That is strategic flexibility.”
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